Designing by Degrees: Flexibility and Cost-Effectiveness in Climate PolicyAbstract: Substantially reducing carbon dioxide (CO2) emissions from electricity production will require a transformation of the resources used to produce power. This paper analyzes the economic consequences of a suite of different flexible and comprehensive policies to reduce CO2 emissions from the power sector, including a carbon tax, a tradable emissions rate performance standard, and two versions of a clean energy standard (CES). A technology-based CES can bring about substantial reductions in CO2 emissions but would neglect to harvest some economic reductions because it fails to affect decisions at three margins, including emissions rate heterogeneity in the natural gas and coal generation fleets and electricity demand reductions. Natural gas emissions rate heterogeneity can be addressed by crediting clean generation based on emissions rates instead of technology. Coal emissions rate heterogeneity can be addressed by altering the policy to credit all generators instead of just a subset. Demand reductions can be harvested by removing the subsidy component of the policy and allowing retail electricity prices to rise. Harvesting emissions abatement on all three margins saves about 40 percent of the discounted cumulative economic welfare costs of a technology-based CES through 2035, although the distributional implications are different. All of the policies result in substantial increases in social welfare.Classification-JEL: Q42, Q48, Q54, Q58

Designing by Degrees: Flexibility and Cost-Effectiveness in Climate PolicyAbstract: Substantially reducing carbon dioxide (CO2) emissions from electricity production will require a transformation of the resources used to produce power. This paper analyzes the economic consequences of a suite of different flexible and comprehensive policies to reduce CO2 emissions from the power sector, including a carbon tax, a tradable emissions rate performance standard, and two versions of a clean energy standard (CES). A technology-based CES can bring about substantial reductions in CO2 emissions but would neglect to harvest some economic reductions because it fails to affect decisions at three margins, including emissions rate heterogeneity in the natural gas and coal generation fleets and electricity demand reductions. Natural gas emissions rate heterogeneity can be addressed by crediting clean generation based on emissions rates instead of technology. Coal emissions rate heterogeneity can be addressed by altering the policy to credit all generators instead of just a subset. Demand reductions can be harvested by removing the subsidy component of the policy and allowing retail electricity prices to rise. Harvesting emissions abatement on all three margins saves about 40 percent of the discounted cumulative economic welfare costs of a technology-based CES through 2035, although the distributional implications are different. All of the policies result in substantial increases in social welfare.Classification-JEL: Q42, Q48, Q54, Q58